Green bonds remain a tiny segment of the fixed-income market even as the number of institutional investors chasing climate-related investments is on the rise globally.
Issuance of green bonds is much exceeded by demand for them. And investors' growing expectations over how issuers should invest the proceeds has discouraged some companies from issuing green bonds.
"Pricing is currently not providing for a buyer's market, reflecting on the demand, which is much higher than supply," said Magnus Billing, CEO of Alecta Pensionsforsakring, Stockholm, the 877 billion Swedish kronor ($92.8 billion) workplace retirement plan provider, and an experienced green bond investor with 35 billion Swedish kroner invested in the asset class.
Large global asset owners such as the ¥159.2 trillion ($1.48 trillion) Government Pension Investment Fund, Tokyo; the €35.8 billion ($40.1 billion) PKA, Hellerup, Denmark, and the 837.5 billion Danish kroner ($125.8 billion) ATP, Hilleroed, Denmark, have recently directly invested small amounts of their allocations into green bonds. But challenges associated with lack of issuer variety and liquidity prevail for most pension funds, preventing the market from becoming more mainstream, sources said.
Currently, there are $389 billion of green bonds outstanding, according to data from the non-profit investor organization Climate Bonds Initiative. That compares with more than $92.3 trillion of debt securities outstanding overall as of Dec. 31, according to data from the Bank for International Settlements.
Even if the issuance of green bonds is steadily growing — and is set to hit a record $250 billion this year, up from $168.5 billion in 2018, according to the climate initiative, sources said, the market will grow when issuers with different levels of credit quality have access.
Some sources see the European Union's incoming green bond standards, as part of the solution to help issuers define how proceeds should be invested.
"One of the problems is greenwashing, which I'm hoping the European Union's taxonomy will help with," says Mikael Bek, head of environmental, social and governance at PenSam, a 140 billion Danish kroner multiemployer defined contribution plan for elder care, technical service and education workers based in Farum, Denmark. Under its policy, the plan will increase green investments to 10% of the fund's total strategic allocation by 2025.
"We are considering investing in green bonds," Mr. Bek said. "We need a larger market. The EU taxonomy will help with clarifying the requirements for proceeds. Then we hope the market will increase."